Syracuse, N.Y. – Destiny USA’s D-Day arrives June 6. On that day, its $430 million in mortgage loans come due in full, and the owner of the giant Syracuse mall is in danger of default.
Pyramid Management Group, the company founded by mall developer Robert Congel in 1970, has indicated it will not be able to pay off the loans by the due date.
As a result, its lender recently took the rare step of transferring the loans to a third-party special servicer, a company that specializes in handling defaults or renegotiating troubled loans for lenders.
On the surface, it looks like a crisis for Destiny USA, the nation’s sixth-largest shopping mall and a major driver of the local retail and entertainment economy. Its owner could potentially lose control of its flagship asset, one right in its own back yard.
But a search of records and several interviews with financing experts by Syracuse.com | The Post-Standard show that below the surface there’s something more going on, something that speaks to the brass-knuckles world of commercial finance.
It’s definitely a mortgage crisis, but it’s also an opportunity for the kind of hardball negotiations for which Pyramid is known.
Destiny USA is far from joining the nation’s growing ranks of dead malls. While every other shopping mall in Central New York is dead or dying, Destiny is frequently filled with visitors. It contains 250 stores, restaurants and entertainment venues, and is visited by 26 million shoppers annually, including many traveling from Canada.
“There are always a lot of cars in the parking lots,” said Pat Hogan, chairman of the Onondaga County Industrial Development Agency and a former city councilor whose district includes Destiny USA.
Robert Congel, 83, is no longer running the company, but Pyramid is still owned by him and is headed by his son Stephen Congel, its CEO. Stephen Congel did not respond to interview requests. But according to one person who spoke with him about the situation, he did not appear worried about losing the mall.
Onondaga County Executive Ryan McMahon said Stephen Congel called him last week to notify him that the mall’s mortgages were being transferred to a special servicer.
“(He) certainly didn’t seem concerned that they would not be able to work out an agreement,” he said. “They seemed upbeat.”
What is likely, experts said, is that Pyramid will agree to changes to the mortgage that it may not like, but which will allow it to retain ownership of its prized shopping and entertainment center.
“I don’t think this is going to be a foreclosure,” said Roy Chun, managing director at Kroll Bond Rating Agency, of New York City. “I think the lender will work with the borrower, and there’s a wide range of things they could do.”
A sweet deal from the city
The mall benefits from an unprecedented level of government subsidies that Congel obtained through a series of tough negotiations, and at times litigation, with three different city administrations.
Under an agreement with the city, Destiny USA does not have to pay property taxes for 30 years, a benefit that will save Pyramid literally hundreds of millions of dollars during that time.
In addition, Pyramid is collecting $112 million from the state under New York’s much-criticized Empire Zone economic development program and has received $69 million from the state under the equally criticized Brownfield Cleanup Program.
With that kind of help from state and local taxpayers, how could Pyramid be in trouble on its mortgage?
Congel borrowed the $430 million from J.P. Morgan Chase in June 2014. That allowed him to refinance an existing $300 million loan on the original part of the mall and providing $130 million to complete the build-out of a large expansion.
Under loan terms common for large commercial developments, the developer has been required to only pay the interest on the loans – a fixed rate of 3.8%. Then, after five years, he was expected to find a new lender to refinance the balance, which remains $430 million.
That’s not the kind of mortgage a homeowner would ever get, because it does not pay down the principal. But it’s a common practice in the commercial lending industry on large properties.
The terms increase the risk for a lender in the event of a default, but banks take that into account when setting the interest rate for a loan, helping ensure they are going to make money. (In addition, banks can shift some of the risk, as Chase did with its Destiny mortgages, by wrapping their loans into securities and selling at least a portion of them to investors.)
And in the case of mall owners like Pyramid, the arrangement frees up money to reinvest in the property to draw in new tenants, said Lisa Spaziano, senior director of commercial mortgage-backed securities surveillance at Kroll.
“Excess cash goes into the mall, as is happening at Destiny,” she said.
Pyramid has been making its interest-only payments, so it’s not in default yet. But it has not been able to obtain new financing to replace the Chase loans, at least not with terms it finds acceptable. That creates the possibility of a default, and that’s why the loans were transferred to a special servicer earlier this month.
A commercial loan going to a special servicer was not uncommon during the Great Recession 10 years ago, but it’s rare in today’s strong economy. Fewer than 1.5% of the 17,800 commercial loans rated by Kroll are in the hands of special servicers, according to the agency.
A tough climate for malls
But two trends in the retail industry are squeezing the mall. The spectacular growth of online retailers like Amazon is taking away customers from brick-and-mortar stores, and consumers pressed for time are increasingly doing their shopping at easy in-and-out shopping plazas.
When Congel began expanding his mall, originally named Carousel Center, in 2007, he saw the coming changes in the retail industry and signed up tenants not likely to be competing with on-line retailers — restaurants, outlet stores and entertainment venues such as WonderWorks, a science-focused indoor amusement park, and RPM Raceway, an indoor go-kart track.
Nevertheless, Destiny USA has not been immune to what’s happening in the industry. Eateries, outlet stores and big entertainment venues help fill a lot of the space in the new section of the mall and draw people to the center, but those types of tenants generally pay lower rental rates.
In addition, the original portion of the mall remains filled with traditional retailers, who are very much feeling the effects of on-line competition. Bon-Ton, one of Destiny’s four large department stores, closed in 2016, and its space remains vacant.
Sales at the mall have slipped in recent years, at least at the original 1.5 million-square-foot section formerly known as Carousel Center. Sales fell from $380 million in 2014 to $345 million last year, about 10 percent, according to documents filed with bondholders.
The percentage of mall space occupied by retailers also declined during the same period, from 97 percent in 2014 to 89 percent last year, the documents show.
These declines are making it harder for Pyramid to refinance the full amount of its mortgages.
“The lending market is less favorable to malls in general,” Chun said. “They’re just much more careful about lending to malls now.”
Impacting Pyramid to a lesser degree are the rising payments it must make on $323 million in other debt on the mall. That money was borrowed when it sold 30-year bonds issued by the Syracuse Industrial Development Agency as part of the mall’s tax deal with the city.
Payments on the bonds, which have a first-lien position, increase 4% a year. They started out at $14 million in 2007, will total $20 million this year and rise to $36 million before the bonds are retired in 2037. That means less of the mall’s shrinking rental revenues are available each year to make its mortgage payments.
Can Pyramid work a better loan deal?
Chun said the special servicer’s options include extending the mortgage loans’ maturity date while requiring Pyramid to pay down some of the principal.
In an odd way, the decline in mall business actually helps Pyramid avoid foreclosure.
Milena Petrova, a professor of finance at Syracuse University’s Whitman School of Management, said it’s doubtful the lender would take the drastic step of foreclosing on the mall, especially if Pyramid remains able to make its interest payments. It’s very likely that the mall’s value has declined since the loan was made, so it’s possible that a forced sale would generate less money than what it is owed on the mortgages, she said.
“The bank really has an interest in giving them more time,” she said.
She said it’s likely Pyramid is trying to negotiate a short-term extension, perhaps of a few months, to give it time to nail down a new loan from another lender. Or, if market conditions remain unfavorable, it might agree to pay down some of the principal in exchange for a longer-term extension of a year or two to buy time to transform more of the mall into an entertainment center, she said.
“I think they’re working on kind of reinventing themselves and looking at ways of attracting customers from Canada,” Petrova said.
If anyone can come out on top in a tough negotiation, it’s Pyramid.
Two years after Pyramid began work on an 874,200-square-foot expansion of the mall, Citigroup stopped making advances on a promised $155 million construction loan. The third biggest bank in the nation cited cost overruns, construction delays and a lack of signed tenants for the addition.
Without the additional financing, Pyramid stopped working on the big expansion. Just quit. The unfinished addition, an empty shell of a building, stood unchanged along Hiawatha Boulevard for two years.
Congel went on the offensive. He sued the bank, alleging breach of contract. After a two-year court battle, Citigroup agreed to a settlement that was highly favorable to the developer.
The bank agreed to forgive the $86 million construction loan it had already advanced, as well as a $100 million mortgage on the original portion of the mall – a total of $186 million in loans that Congel did not have to pay back. All the developer had to do was find another lender to refinance a remaining $310 million mortgage on the property, ending all of Citigroup’s ties with Pyramid.
Soon after, Congel found a new lender — J.P. Morgan Chase, the nation’s biggest bank – to loan him $430 million. It’s that same $430 million that, five years later, is the subject of new negotiations between his company and a lender without a lot of good options.
Staff writer Tim Knauss contributed to this report.